Trading on margin is not commonly done in stock trading except by professional investors and institutional traders. However, trading on margin is standard practice in the futures markets and forex trading. The ability to trade on a relatively low margin, with high leverage, is part of what attracts many speculators to futures and forex trading.

Trading on Margin

In trading stocks on margin – most common in short selling – the maximum margin allowed is usually 50%. The remaining half of the stock price is provided by a loan from a broker. In futures and forex trading the margin requirements are much lower – as low as 1% to 5% of the traded contract value – and the margin posted by a trader represents a good faith deposit. This affords the trader a high level of leverage to greatly amplify the effect of price changes in terms of the dollar amount of gain or loss in the trader's account.

If the market moves in the trader's favor, this leverage enables the trader to realize significant profits on even small price changes. However, if the market moves against the trader's position, just a moderate price shift amplified by the leverage used can lead to losses greater than the trader's margin deposit.

Initial Margin Requirements

The initial margin requirement is the amount a trader must deposit to initiate a trading position. Once a trading position is established, a trader must maintain a certain balance, typically 50-75% of the initial margin, to continue holding the position.

Maintenance Margin

If the account falls below this specified maintenance margin level, then the broker sends the trader a margin call, informing the trader that they must immediately deposit sufficient funds to bring the account back up to the initial margin level. If the trader fails to do so promptly, the broker will close out the trader's market position.

For example, if the initial margin requirement for trading one gold futures contract is $1,000 and the maintenance margin requirement is $750, then if the balance in the trader's account drops to $725, the trader must deposit an additional $25 to bring the account back to the original initial margin level.

  1. What is a margin account?

    A margin account is an account offered by brokerage firms that allows investors to borrow money to buy securities. Read Answer >>
  2. What is the difference between initial margin and maintenance margin?

    Learn the difference between an initial margin requirement and a maintenance margin requirement and how these affect an investor's ... Read Answer >>
  3. Profit margin versus operating margin: What's the difference?

    There are some distinctions between profit margin and operating margin. Both measure efficiency of a firm, but one takes ... Read Answer >>
  4. How do you Fund a Forex Account?

    Forex traders are usually given several options when deciding how to deposit funds into trading accounts, learn how and what ... Read Answer >>
  5. What's the difference between a cash account and a margin account?

    All transactions in a cash account must be made with available cash or long positions; a margin account allows investors ... Read Answer >>
Related Articles
  1. Trading

    Margin Trading

    Find out what margin is, how margin calls work, the advantages of leverage and why using margin can be risky.
  2. Trading

    Top Reasons Forex Traders Fail

    This market can be treacherous for unprepared investors. Avoid these mistakes that keep FX traders from succeeding.
  3. Trading

    An Introduction To Trading Forex Futures

    We explain what forex futures are, where they are traded, and the tools you need to successfully trade these derivatives.
  4. Trading

    How much trading capital do forex traders need?

    Forex traders can see substantial benefits from capital gains in the form of a small pip profit over time.
  5. Managing Wealth

    What’s a Good Profit Margin for a New Business?

    Surprisingly, the younger your company is, the better its numbers may look when it comes to your profit margin.
  6. Trading

    The Advantages of SPAN Margin

    Find out how SPAN margin gives option strategists more bang for their buck.
  7. Trading

    10 ways to avoid losing money in forex

    When approached as a business, forex trading can be profitable and rewarding. Find out what you need to do to avoid big losses as a beginner.
  1. Maintenance Margin

    Maintenance margin is the minimum amount of equity that must ...
  2. Variation Margin

    A variable margin payment that is made by members to their respective ...
  3. Liquidation Level

    In forex trading, the liquidation level is the point when the ...
  4. Excess Margin Deposit

    An excess margin deposit is cash or equity in a margin trading ...
  5. Margin Account

    A margin account is a brokerage account in which the broker lends ...
  6. Credit Balance

    In a margin account, A credit balance is the sum of proceeds ...
Trading Center